Category: technology stocks

Sophos bags an elephant

Brenon Daly

In a twist on a private-public transaction, Sophos laid out on Monday a bold $340m plan to pick up Utimaco, an encryption vendor that trades on the Frankfurt Stock Exchange. Rather than rolling into the public company, Sophos plans to take Utimaco off the market. It plans to fund the acquisition by drawing on three sources. (My colleague, Nick Selby, has the details on the financing as well as the strategy.)

The financing is crucial because this deal is a whopper. If it goes through, it’ll be the largest IT security deal in seven months. More significantly, however, Sophos’ planned acquisition of Utimaco stands as the biggest purchase by a privately held security company. In fact, it’s nearly twice the size as the number two deal, Barracuda’s unsolicited run at Sourcefire. (And it’s not certain that deal will close at all. Sourcefire, which is slated to report second-quarter earnings on Thursday, has shot down the deal so far.)

Although Utimaco will be erased from the market, we view the disappearance as temporary. Once the two companies get through the integration, we expect Sophos to try to go public once again. (Recall that last fall, it announced plans to list on the London Stock Exchange but shelved them as the markets deteriorated.) Among the underwriters for the planned IPO was Deutsche Bank, which advised Sophos on the purchase of Utimaco. Indeed, it was the same DB banker on this deal that also co-advised on a very similar transaction last fall, McAfee’s $350m purchase of Dutch encryption vendor SafeBoot. (DB and UBS Investment Bank advised SafeBoot, while Morgan Stanley advised McAfee.)

A scratch-and-dent sale for Vignette?

Brenon Daly

With its shares currently bumping their lowest level in three years, Vignette has done little to help itself. In its second-quarter report Thursday, the dismaying decline in sales of its software continued. In the first half of 2008, Vignette has recorded just $20m in license sales, down from $30m in the first half of 2007. By way of understatement, CEO Mike Aviles acknowledged that Vignette’s software sales ‘are not where we want them’ but added additional marketing spending and recent changes in the company’s sales executives should help.

We’re not so sure those moves will help the struggling company. Vignette already spends one-third of its revenue on sales and marketing, and indicated that it may bump up that level for the rest of the year. (Not that the company has much insight into how business will run in the coming months. Consider its laughably broad guidance to Wall Street on its loss of the current quarter: It said it’ll lose something between 7 and 21 cents per share in the third quarter, representing a net loss in the period of $1.7-5m.)

One of the main reasons Vignette continues to struggle is that it’s going against some tough competition, including Oracle and IBM, as well as stand-alone content management players. For that reason, we could certainly see Vignette benefiting from being part of a larger company. And indeed, we’ve heard from two sources that the ongoing auction for Vignette has narrowed to two final parties. While we don’t know the specific names, we suspect Hewlett-Packard may well be one. (Don’t forget that the head of HP’s software division, Tom Hogan, knows Vignette intimately. Hogan served as CEO of the company from 2002-2006 before moving to HP.)

And the price for Vignette certainly isn’t prohibitive. With the stock having slid 40% over the past year, Vignette currently garners a market capitalization of just $280m. However, the debt-free company also has $90m in cash and equivalents in its bank account, lowering the net cost of Vignette to just $190m. That’s about the same level of sales it is likely to report this year. In the past, shoppers have paid 2.6 to 2.9 times enterprise value/revenue for their purchases of other publicly traded content management vendors. However, we doubt Vignette – with its slumping software sales and spendthrift marketing plans – will command that kind of multiple.

Selected significant content management deals

Date Acquirer Target Price EV/sales multiple
August 2006 IBM FileNet $1.6bn 2.6x
November 2006 Oracle Stellent $440m 2.9x

Source: The 451 M&A KnowledgeBase

Cisco’s M&A machine unplugged

Brenon Daly1 Comment

While Brocade Communications has used its $3bn purchase of Foundry Networks to turn up the pressure on Cisco Systems, we would quickly add that Cisco itself has hardly used M&A at all this year. Typically one of the busiest corporate acquirers, Cisco has averaged about a deal per month in recent years. However, so far this year, the networking giant has acquired just one company, DiviTech. (In addition to last month’s purchase of the tiny Danish company, the only other announced move in 2008 was snapping up the 20% stake in its subsidiary Nuova Systems that it didn’t already own.)

Earlier this year, we noted that Cisco was rumored to be making a run at Citrix. Although that speculation initially helped boost Citrix shares, they have since sunk to a 52-week low. The decline over the past three months has shaved a half-billion dollars off Citrix’s market capitalization, representing a decent ‘rebate’ for any acquirer of the infrastructure software vendor. It currently sports a $5bn market capitalization. In the past, Cisco has shown itself ready to seal multibillion-dollar deals, including its $6.9bn purchase of Scientific-Atlanta in late 2005 and its $3.2bn acquisition of WebEx Communications in March 2007. Cisco is slated to report its fiscal 2008 results in two weeks.

 Cisco’s disappearing deals

Period Deal volume Deal value Notable acquisitions
Jan. 1 – July 21, 2005 7 $899m FineGround Networks, Airespace, Topspin Communications
Jan. 1 – July 21, 2006 4 $143m Meetinghouse Data Communications, SyPixx Networks
Jan. 1 – July 21, 2007 9 $4.2bn WebEx Communications, IronPort Systems, Neopath Networks
Jan. 1 – July 21, 2008 1 undisclosed DiviTech

Source: The 451 M&A KnowledgeBase

TomorrowNot

Brenon Daly1 Comment

There will be no more tomorrows for TomorrowNow. SAP, which bought the software maintenance provider in January 2005, said Monday it’s shuttering the division. Even though the German giant is killing off TomorrowNow, the lawsuit involving its subsidiary will live on. Recall that Oracle sued SAP more than a year ago, alleging TomorrowNow illegally downloaded information about Oracle’s support program. (SAP initially acquired TomorrowNow as a way to siphon off some of the rich maintenance stream that Oracle collects for supporting its application. Ironically, SAP launched the program with the title ‘Safe Passage.’)

Since the original lawsuit was filed in March 2007, the scope of it has broadened. Oracle is now seeking $1bn in damages. With TomorrowNow facing that kind of a hit, it’s perhaps not surprising that SAP, which had been shopping the division for several months now, found no willing buyer. We can only imagine the lengths that SAP must have gone through to write around the potential $1bn liability in putting together a pitch-book for TomorrowNow. However SAP worded the ‘for sale’ ad, it failed to generate any interest, even with the person who probably knows more about the business than anyone else.

Seth Ravin, who founded and ultimately sold TomorrowNow to SAP, has since moved on and founded a similar business supplying discounted support for ERP applications, Rimini Street. Although Rimini Street may have looked at bulking up through acquiring TomorrowNow, reports indicated that the company passed on a deal. We can only imagine how much SAP wishes it go back in time and pass on the TomorrowNow deal, which has brought it so much trouble.

Troubled timeline

Date Event
Jan. 2005 SAP acquires TomorrowNow
March 2007 Oracle sues SAP, alleging illegal corporate espionage
Nov. 2007 SAP looks to sell off TomorrowNow
April 2008 Oracle expands lawsuit
Feb. 2010 Case scheduled to be heard in court

Should Ask prepare to get Answers?

Ask.com – a subsidiary of IAC/InterActiveCorp – closed its acquisition of Lexico Publishing Group last week. The 16-person company, which includes Dictionary.com, Reference.com and Thesaurus.com, reportedly went for $100m in cash, representing a multiple that we estimate at 10 times its trailing twelve-months revenue, or more than $6 per monthly unique visitor. This acquisition comes after a tumultuous ride for the profitable Lexico. The company was almost acquired by Answers Corp (Answers.com) in 2007, but after Answers failed to drum up proper financing, the deal turned sour. It was officially terminated in February, presenting an opening for Ask.com to swoop in. Besides being a happy ending for Lexico, which has been chasing an exit for a while, this fits well with Ask.com’s restructuring strategy of returning to its roots as an answer facilitator after its short but decidedly failed attempt to out-Google Google in the search engine department. Ask.com has openly said that more acquisitions are forthcoming. So who might the company buy next?

Among others, we see Answers.com itself as a potential acquisition target. Despite a growing base of about 20 million loyal users, the provider has had a tough time monetizing its page views and has been bleeding cash for more than a year now. Incorporating Answers.com’s user base and content could solidify Ask.com as the leader in the answer-search business. And with Amazon and Yahoo moving in on Ask.com’s turf, it is necessary for the company to continue to grow its market share. Indeed, we’ve heard industry rumors that Ask.com had made overtures to its rival well before the failed Lexico deal. And interestingly, Redpoint Ventures recently pumped $6m (with an option for another $7m) into Answers.com. That is the same Redpoint Ventures that helped fund Ask.com during its early days and that still has a stake in the IAC division. Ask.com’s former CEO Jim Lanzone also happens to be an entrepreneur-in-residence at Redpoint.

Surely the struggling company could be had for much less than the revenue multiple accorded to Lexico, which reported a healthy EBITDA of about $3m for calendar 2006, the last data made public. While the revenue multiple and price-per-user metrics of the Lexico deal would suggest a $100m-plus valuation for Answers, the company, which reported an operating loss of about $3.7m in the first quarter of this year, is clearly going to be valued at a steep discount. It’s currently trading at a 52-week low, with a market cap of just above $23m, or just a bit more than two times trailing revenue and a little over a dollar per user. With more than three times the number of employees as Lexico, Answers clearly has a much more labor-intensive model than its peer. That may change, though. Answers.com’s fast-growing new WikiAnswers.com service offers a lower-cost community-based answer site and is expected to exceed the more labor-intensive Answers.com service in revenue by the second half of 2008.

At a minimum, we estimate that Ask.com would have to shell out somewhere in the neighborhood of $30m, or roughly $3.80 per share, for the company – a 30% premium to the current price. It’s certainly not a question of whether IAC can afford the deal – it currently has a little more than $1.2bn in cash and a market cap of $4.7bn – but how much it could leverage the deal by cutting costs, monetizing the user base and expanding the WikiAnswers business. Indeed, for Answers.com, an acquisition by Ask.com may be just what the company and its desperate shareholders have been looking for.

On a final note, Ask.com’s new strategy of no longer trying to beat Google at its own game is in stark contrast to that of Microsoft, whose recent investments and acquisitions put it on a head-on collision course with Google. However, Microsoft’s recent acquisition of Powerset at least gives it technology that is capable (within Wikipedia, at least – it is yet to be tested publicly on a large corpus) of providing answers to both questions and keyword queries and could end up being a major challenge to the Q&A format Ask.com favors. That is, of course, if it doesn’t get lost in the mix if Microsoft should buy Yahoo’s search business.

Courting deals

Brenon Daly

Just how often is legal discovery a form of M&A due diligence? We asked ourselves that question on July 2 when IBM shelled out an undisclosed amount of money for Platform Solutions (PSI) after the two companies had battled each other in the courtroom since late 2006. Big Blue’s initial suit alleged patent infringement, while PSI’s countersuit raised questions of antitrust concerns.

Of course, we would never suggest that Big Blue simply bought off PSI, using its vast cash reserves to quiet a critic. And even if that was IBM’s motivation, we can hardly fault the company for determining that money spent to move its mainframe business ahead through acquisition has a higher potential ROI than just writing checks to lawyers.

With that case closed (as they say in the courtroom), we wonder if a similar scenario will play out at i2 Technologies. As we’ve noted in the past, the supply chain software vendor has run into a heap of problems, prompting it a year ago to hire JPMorgan to advise it on ‘strategic alternatives.’ One of those problems got resolved recently when SAP agreed to fork over $83m to settle a nearly two-year-old patent infringement suit. (To put i2’s legal windfall into perspective, consider that the settlement is twice as much as the company has earned in the past two years combined.) While we initially figured a buyout shop as the likely acquirer for i2, we now wonder if the settlement from SAP is merely a down payment on an acquisition of i2.

Courtroom drama

Parties Legal issue Outcome
IBM-Platform Solutions Patent infringement IBM acquires PSI, undisclosed amount
SAP-i2 Patent infringement SAP pays $83m settlement, all charges dropped

Source: The 451 M&A KnowledgeBase and SEC

M&A for HR

Brenon Daly

Last February, EMC made the curious purchase of a tiny Seattle-based information management startup, Pi Corp, which had yet to release a product. We scratched our heads over the acquisition, in no small part because the release announcing the deal spent as much time talking about Pi’s leader Paul Maritz as it did about the company itself. That shopping trip in Microsoft’s neighborhood makes a lot more sense now that we know Maritz is taking over at VMware. Call it M&A for HR.

A 14-year veteran of Microsoft, Maritz is replacing Diane Greene, the founder and undisputed queen of VMware. (A person who worked under Greene but moved on to another virtualization company recalled recently that she had a say in essentially every aspect of the firm, down to picking out the door handles at its headquarters.) An engineer, Greene built one of the fastest-growing software companies. Just nine short years after its founding, VMware was able to push revenue to more than $1bn, finishing 2007 at $1.3bn.

Greene managed that tremendous growth despite an often tense relationship between VMware and its parent EMC. About the only knock on Greene’s leadership was her decision to sell VMware to EMC for $625m – a transaction that allowed EMC to reap billions of dollars of value creation at VMware, while essentially leaving the latter to operate on its own. Maritz is now charged with navigating that relationship, as well as parrying ever-sharper competitive threats, principally from his old employer and its release of Hyper-V. In terms of compensation, we can only hope Maritz didn’t load up his contract with VMware options. Otherwise, the new CEO may well find himself underwater during his time in the corner office. VMware shares sunk to their lowest-ever level in midafternoon trading Tuesday, plummeting 27% to $38.75.

Location-based stalking?

2 Comments

Nokia has been going navi-crazy lately. Last week, the Finnish conglomerate bought location-based social networking company Plazes for an estimated $30m. This comes as the company is wrapping up the largest acquisition in its history – the $8.1bn purchase of Navteq. We believe this is just the beginning for Nokia and others in the excessively hyped mobile location-based services (LBS) space. The question arising from this acquisition, as well as Vodafone’s $48.7m acquisition of Zyb in May, is what these acquisitions mean for the rest of the market. One implication is already clear: GPS technology has been commodified. (Just ask shareholders of Garmin, who have seen the stock skid to a two-year low.) With this technology popping up on dozens of devices, we expect hardware vendors to be even more active in snapping up LBS startups.

Nokia plans to roll Plazes into its Nokia Maps division, which itself was formed from the acquisition of gate5 in late 2006. It is part of Nokia’s overall strategy to have GPS technology play a large role in expanding beyond just being a mobile hardware company. Nokia claims it will sell upward of 37 million GPS-enabled handsets this year alone. The approaching worldwide release of the GPS iPhone, as well as Research in Motion’s push to include the technology in most of its BlackBerry devices, make it clear why high-profile backers such as KPCB and Sequoia Capital are so excited about LBS applications.

Beyond being a simple technology purchase, however, Plazes and other future deals will likely bring another important component to the apps: users. Despite their hype and position as leaders in the space, services such as Palego’s Whrrl, Loopt and Brightkite have fewer than a million users combined. Compare that to the hundreds of millions of users that ‘traditional’ social-networking sites such as Facebook and MySpace command, and one wonders what the hype is all about. By pairing up with larger companies, however, the services get instant access to millions of users. It is the technology and expertise that rumored suitors such as Facebook, Microsoft, Google and now the mobile carriers and hardware manufacturers are interested in. With continued consolidation, the fear of being left behind in a potentially important market will drive many to acquire first and ask questions later. Nokia might have just lit the fire in the M&A race to dominate the LBS market.

Seven signs of a consolidating LBS industry

Announced Acquirer Target Deal value
June 2008 Nokia Plazes $30m*
June 2008 Polaris Hughes Telematics $700m
May 2008 Vodafone Zyb $48.7m
October 2007 Nokia Navteq $8.1bn
July 2007 TomTom Tele Atlas $2.8bn
July 2007 Springbank Resources Location Based Technologies (fka PocketFinder) $50m
August 2006 Nokia gate5 $250m*

*estimated, Source: The 451 M&A KnowledgeBase

M&A goes MIA in Q2

Brenon Daly1 Comment

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase